Headline: "Value emerges as spreads bottom out; upgrade BSL to...

Headline: "Value emerges as spreads bottom out; upgrade BSL to Buy"

Extracts:

"Following a peak in East Asian and US steel spreads in July 2018 and August 2018 respectively, both markets have declined materially, contracting by 42% and 31%, respectively, as of 31 December 2018. Output HRC pricing has been a significant driver behind this contraction, with both East Asian and US pricing both falling 14% and 12%, respectively, below October levels. This has continued to drive a sector wide re-rate which we previously identified in our November Australian Steel Spread, although we now believe the worst is behind us and identify value emerging within the sector."

"Accordingly, we update our steel price and spread outlook and upgrade BSL to Buy on valuation grounds and a more positive outlook for steel spreads. The MTM of our earnings estimates and TP for Australian steel stocks has a material impact on both BSL.AX (Buy) and SGM.AX (Buy). We increase our BSL.AX FY19/20/21 EPS estimates by -3.6%/6.2%/4.1% and increase our 12m TP by 1.9% to A$15.28. We decrease our SGM.AX FY19/20/21 EPS estimates by -7.5%/-2.0%/-2.7% and decrease our 12m TP by 11.5% to A$13.27."

"BSL and SGM now trading at historical lows. Steel stock multiples have tended to re-rate very sharply as earnings are realized and forward expectations reset with guidance. Across the A/NZ steel sector we note that BSL has been most influenced by this global de-rating trend, given its strong underlying operating volume and cost performance leave it the most exposed to macro price and spread influences. This has led to a significant de-rate in the share price (now down 42% from its July 2018 peak) and now sees the stock trading at 2.8x EBITDA (consensus), a very deep discount to both steel sector peers (4.9x) and its long term average (5.0x). Based on BSL’s trading history (Exhibit 4), the stock has shown a tendency to over-correct and during previous occurrences has recovered at least half the discount over the subsequent 12 months."